What is Debt-to-EBITDA Ratio?
Debt-to-EBITDA compares a company’s total debt (or net debt) to its earnings before interest, tax, depreciation, and amortization. It is one of the most widely used leverage metrics by lenders and credit-rating agencies — a quick proxy for how many years of earnings would be needed to repay the debt.
How It Works
- Formula: Total debt / EBITDA (or Net debt / EBITDA)
- Lower is safer; higher is riskier
- Investment-grade companies often target under 3.0x; high-yield issuers may run 4-6x
- Used in loan covenants — a breach can trigger default
- Industry-dependent: utilities can carry more debt than retailers because of stable cash flows
Saudi Context
Saudi banks and capital markets use net-debt/EBITDA as a primary screen for syndicated loans, sukuk pricing, and acquisition financing. SAMA-regulated banks also monitor it as part of borrower risk grading.
Example
A Saudi industrial company has net debt of SAR 4B and EBITDA of SAR 2B. Debt-to-EBITDA = 2.0x — comfortably investment-grade. If a downturn cuts EBITDA to SAR 1B, the ratio doubles to 4.0x, possibly tripping a covenant in its syndicated facility.